It has been quite a rollercoaster ride for NIO (NYSE: NIO) of late. Between the end of August and the start of last month – a matter of weeks – NIO stock soared by 94%. Since then though, the electric vehicle (EV) maker has seen its share price plummet by 38%.
That still leaves it well above where it was just a few months ago, and 154% higher compared to five years back.
Still, could the recent price fall give me a buying opportunity?
Seesawing price action
It is helpful to understand why we have seen such dramatic moves in NIO stock over the past several months. The market reacted gleefully to the company’s second quarter business performance update.
Vehicle deliveries jumped 143% compared to the prior year period. I think that was positive for the NIO investment case in many ways. It demonstrated strong end user demand, as well as helping move the carmaker closer to realising more economies of scale.
But the dramatic jump in share price was perhaps overdone even for that good news. I think that explains why the price has come back down in recent weeks.
Strong long-term opportunities
Still, that leaves NIO with a market capitalisation not far short of $10bn. I think that is a lot for a consistently lossmaking company that is spending money like a drunken sailor.
It is worth bearing in mind that rival Tesla was lossmaking for years before turning a profit. The huge costs involved in designing and building vehicles at scale mean it is not an activity for those with shallow pockets.
Tesla has proven to be an incredible investment for many investors, soaring 1,299% in the past five years alone.
NIO’s strong sales growth momentum and expanding base of existing users both work in its favour. I think it has other competitive advantages too. For example, its proprietary battery-swapping technology helps overcome one of the most common annoyances of EV drivers, namely limited range on a single charge and the resulting need to plan some trips carefully to find charging stations.
Lots to prove
But the business still has a lot to prove, not least that it can be profitable. On top of that, comparing NIO now (or even Tesla now) to Tesla a few years ago misses one vital consideration. The market has changed significantly.
EVs have become much more popular, which works to NIO’s advantage. But competition has also got a lot fiercer. That has resulted in prices being pushed down, hurting profitability across the industry. I see that as a risk that is likely to remain.
In fact, Tesla’s more diversified business – it also has a sizeable power generation division – potentially gives it financial flexibility to compete on car price compared to rivals whose revenues rely exclusively on EVs.
So while I like NIO, I do not see the current stock price as a bargain for what remains essentially an unproven business when it comes to making profits. I am not ready to invest.
